The difference between success and failure in Forex trading is very likely to depend mostly upon which currency pairs you choose to trade each week and in which direction, and not on the exact trading methods you might use to determine trade entries and exits.
When starting the trading week, it is a good idea to look at the big picture of what is developing in the market as a whole and how such developments and affected by macro fundamentals and market sentiment.
There are several strong valid trends in the market right now, so it is a great time to be trading to take advantage of that.
Big Picture 22nd August 2021
Last week’s Forex market was active and trending strongly, with some pairs hitting new long-term highs or lows. The U.S. dollar, Japanese yen and, to a lesser extent, the Swiss franc, are strong, while the commodity and risk currencies are weak.
I wrote in my previous piece two weeks ago that the best trade was likely to be going long of the S&P 500 Index following a daily (New York) close above 4423 and short of the AUD/USD currency pair following a daily (New York) close below 0.7328. This produced a gain by the S&P 500 Index of 0.29%, while the AUD/USD currency pair did not make a close below 0.7328 that week, although it has since broken down strongly well below that level.
Fundamental Analysis & Market Sentiment
The headline takeaway from last week was the resumption of a strong bullish trend in the U.S. dollar which is being echoed by the Japanese yen and Swiss franc. The economic impact of the resurgent coronavirus globally driven by the delta variant also remains a concern to risk appetite as it causes problems with supply chains. The major news events driving the Forex market were the release of the latest FOMC meeting minutes, which contained no major surprises, but which indicated that the Federal Reserve would begin tapering its QE program before the start of 2022, and the Reserve Bank of New Zealand’s pass on an anticipated rate hike from 0.25% to 0.50%, plus Canadian and British CPI (inflation) data. However, it was one of those weeks where price trends drove the market far more than any data releases, so the impact of these events was muted.
Next week will be dominated by the G7 Jackson Hole Economic Policy Symposium which will be closely watched by the market, plus US preliminary GDP data. Due to the strongly trending market, the Forex market is therefore likely to show a similarly high level of activity next week.
Last week saw the global number of confirmed new coronavirus cases and deaths rise for the ninth consecutive week after falling for two months previously, suggesting that the spread of the more highly infectious Delta (Indian) variant has had a major impact on global numbers. Approximately 24.3% of the global population has received a full course of vaccination.
It seems to be becoming clear that due to the widespread Delta variant, which studies are beginning to show may be as easily transmissible as chickenpox, the only way to stop natural spread of the disease by “herd immunity” would be for more than 95% of an entire population to be fully vaccinated. There are also increasing indications that the effectiveness of vaccines wanes notably after approximately five months has elapsed from the last administration. These factors make even a local eradication of the coronavirus extremely difficult to achieve. Some nations have begun to administer third “booster” shots to ensure greater protection for the older population.
The strongest growth in new confirmed coronavirus cases right now is happening in Albania, Armenia, Azerbaijan, Australia, Belarus, Belize, Brunei, Bulgaria, Canada, Cuba, Ethiopia, Georgia, Germany, Guatemala, Israel, Jamaica, Japan, Kosovo, Laos, Malaysia, Mauritius, Mexico, Moldova, Montenegro, North Macedonia, Philippines, Sri Lanka, Switzerland, the U.S., the U.K. and Vietnam.
Technical Analysis
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index printed a large, strongly bullish engulfing candlestick last week. The price broke decisively above the former resistance level at 11974 and made its highest weekly close in more than 9 months. These are all very bullish signs and there is no doubt the U.S. dollar strength is driving the Forex market right now, with almost every currency except the yen and Swiss franc losing ground against the greenback. This suggests that trades long of the USD against other currencies are most likely to be appropriate over this coming week.
NASDAQ 100 Index
The NASDAQ 100 Index printed a pin candlestick which is just a very little way below its all-time high weekly closing price made last week. I would look to get long again following a new daily close at an all-time high closing price (at or above 15187). Since the coronavirus crash of 2020, this major U.S. equity index has more than doubled in value, which is an excellent return over barely sixteen months. The NASDAQ 100 Index remains a conditional buy.
AUD/USD
The AUD/USD currency pair fell strongly after breaking down last week, printing a large bearish candlestick that closed very near its low. Last month closed at a new 6-month low price and last week’s close is a 9-month low. These are bearish signs. The AUD has been hit as the primary “risk” barometer currency against a very strong U.S. dollar and has already been falling for several weeks. These are all very bearish signs, and we are seeing strong bearish momentum, so I see good reasons to look to be short of this currency pair.
EUR/USD
The EUR/USD currency pair moved down last week, printing a bearish engulfing candlestick, and making its lowest weekly close in almost 9 months. However, it is important to note that the U.S. dollar is advancing everywhere, and that the euro is not falling as rapidly or as strongly against the greenback as other currencies such as the Australian dollar. Also, the price has not really cleared the 1.1700 handle yet. This pair may start to break down more quickly, but I would look for a strong down day to end with a close near the day’s low well below 1.1700 before considering entering a new short trade.
Bottom Line
I see the best opportunity in the financial markets this week as being long of the NASDAQ 100 index following a daily (New York) close above 15198 and short of the AUD/USD currency pair.